Housing rebound fuels fears of another bubble

New homes spring up in the Phoenix area. The biggest price gains are occuring in states that experienced the worst housing bust.

New homes spring up in the Phoenix area. The biggest price gains are occuring in states that experienced the worst housing bust.

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New homes spring up in the Phoenix area. The biggest price gains are occuring in states that experienced the worst housing bust.

New homes spring up in the Phoenix area. The biggest price gains are occuring in states that experienced the worst housing bust.

Housing rebound fuels fears of another bubble

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WASHINGTON — As home prices rise, so do concerns that a new housing-market bubble may be appearing, particularly in cities with double-digit annual growth rates.

“I wouldn't say that we have bubbles today. But if prices keep rising at these rates, pretty soon you will be in bubble territory,” said Dean Baker, co-director of the Center for Economic and Policy Research, a Washington think tank. “Generally, you don't see situations with rapidly rising prices and they just stop.”

Before the bubble burst, year-over-year price growth topped 17 percent. The current rebound has yet to reach such a frenzied pace, though home prices recently posted year-over-year growth of 12 percent, the fastest rate since 2006, according to the Case-Shiller index that tracks 20 cities.

Many of the cities with the largest price gains are where housing crashed hardest when the bubble burst. In Las Vegas, home prices recently posted year-over-year growth of 22 percent — but remain more than 50 percent below a 2006 peak, according to the most recent S&P/Case-Shiller report. Prices in Phoenix and Miami are also more than 40 percent below local peak levels despite jumps.

“What's important to keep in context is that those double-digit gains are off of very low prices. Even with those gains, prices are still relatively low,” said Frank Nothaft, chief economist at federally controlled mortgage buyer Freddie Mac.

The San Antonio market has seen increases in median price, but not at a frenzied level. The San Antonio Board of Realtors reported recently that the median price of a single-family home had risen 5 percent compared with last year.

Such large price gains are unsustainable, especially as rising mortgage rates cut affordability and income growth plods along. At a certain point, rapidly rising prices mean investors looking for high rates of return will be less interested. With fewer investors, first-time buyers and others may have a better shot at participating in some of the hottest markets. Rising prices also encourage greater home construction, which expands inventory levels and eases price pressure.

Jed Kolko, chief economist at real estate site Trulia, found that home prices were 7 percent undervalued in the second quarter, compared with being overvalued by a peak of 39 percent in the first quarter of 2006.

“That's why today's price gains are actually still a rebound, not a bubble,” Kolko said in a blog post.

In a healthy market, owning a home should be within reach for a typical family, economists say. A gauge from the National Association of Realtors indicates that affordability has declined 18 percent since January but is 17 percent above its average in the past decade.

The presence of large numbers of troubled properties also differentiates the current housing market from those in the past. While shadow inventory, which includes properties with seriously delinquent mortgages, in foreclosure or held by mortgage servicers, has been declining, it remains relatively high.

Shadow inventory dropped to about 2 million homes in April from a peak of 3 million in 2010, far higher than the 650,000 in early 2006, according to CoreLogic. Fewer distressed homes, which are sold at a discount to other properties, means that year-over-year price comparisons are skewed upward. As distressed homes work their way out of the system, this effect will decline.

Here's one potential red flag: House flipping is back.

So far this year, about 250,000 single-family homes have been sold that also were sold within the prior 12 months, according to RealtyTrac, an online foreclosure marketplace. If that pace is maintained, there could be about half a million flipped homes by the end of the year, up 4 percent from last year and almost double the total in 2005.

“High levels of flipping are indicative a market that is speculative and at risk of becoming overheated,” said Daren Blomquist, vice president at RealtyTrac. But, he added, this is likely a short-term trend given recent drops in areas such as Southern California and Phoenix.